Insurance Law Hawaii

Exclusion Barring Suits By One Insured Against Another Found Inapplicable

   The court analyzed the impact of the policy exclusion barring coverage where one insured sued another. Gemini Ins. Co. v. Delos Ins. Co., 2012 Cal. App. LEXIS 1230 (Cal. Ct. App. Dec. 5, 2012).

   Delos insured Bobby's, a restaurant, located in the Loch Lomond Marina, San Rafael, California. The landlord was Loch Lomond Marina. A fire at Bobby's caused damage to Loch Lomond's property. Another business, Arena Yacht, also suffered property damage from the fire. Loch Lomond was insured by Gemini for property damage. 

    Gemini paid Loch Lomond $288,259 and Arena Yacht $65,088 for the damage caused by the fire. Gemini then sued Bobby's for subrogation, alleging Bobby's negligence caused the fire. Delos defended Bobby's. The case settled. Bobby's and Gemini entered into a stipulated judgment for the total which Gemini had paid to its insureds. Delos paid $65,088 of the judgment, the amount Gemini had paid to Arena Yacht. 

   Gemini then sued Delos. Delos' policy did not provide coverage for any claim or suit brought by another insured. Loch Lomond was an additional insured under the policy. Delos therefore argued that it did not cover Bobby's on a claim by Loch Lomond for damage to Loch Lemond's property. Gemini contended Loch Lomond was not an insured under Bobby's Delos policy.

   The trial court agrred with Gemini, finding that under the language of the Delos policy, including the additional insured endorsement, Loch Lomond was never an "insured" under the policy. Judgment was entered for Gemini in the amount of $288,259, the amount Gemini had to paid to Loch Lomond.

   The Delos policy's Interinsured Claims and Suits Exclusion barred coverage for any insured against a claim or suit by another insured. The policy defined "insured" as "an organization other than a partnership, joint venture, or limited liability company." The additional insured endorsement listed Loch Lomond as an additional insured.

   However, there was another relevant policy endorsement entitled "Additional Insured - Managers or Lessors of Premises." Under this endorsement, Loch Lomond was an additional insured only when it faced liability arising from Bobby's acts, undertaken in the course of Bobby's operations on the leased premises. No one had sought to hold Loch Lomond liable for the fire. Instead, in the underlying case, Loch Lomond sought to recover from Bobby's.

    Therefore, the interinsured claims and suits exclusion did not apply and the trial court's judgment was affirmed.

Blogging for Five Years

   We passed our fifth anniversary for this blog earlier this month. It has been an interesting journey, over 630 posts now, unquestionably a self-education in insurance issues, as well as a mechanism for connecting with others.

   And we have readers, too. Again, thanks for the support this year, compelling us search for material worth posting, and then attempting to write up succinct but comprehensible posts.

   Hats off once again to my fellow Damon Key bloggers, Robert Thomas (http://www.inversecomdemnation.com), Mark Murakami (http://www.oceanlawhawaiil.com), David McCauley (http://www.hawaii-immigrationlawyer.com/) and Anna Oshiro(http://www.hawaiiconstructionlaw.com/), for their blogging insight and assistance in locating current and interesting cases. 

   We look forward to our sixth year of blogging.  Please continue to visit.

Legislation Expanding "Occurrence" to Cover Faulty Workmanship Cannot Be Applied Retroactively

   The South Carolina Supreme Court held that the legislative definition expanding the meaning of "occurrence" to include damage resulting from faulty workmanship cannot be applied retroactively. Harleysville Mut. Ins. Co. v. The State of South Carolina, 2012 S.C. LEXIS 270 (S.C. Nov. 21, 2012).

   The South Carolina legislation, Act No. 26, was enacted on May 17, 2011. It states that CGL policies shall include in the definition of "occurrence" "property damage or bodily injury resulting from faulty workmanship, exclusive of the faulty workmanship itself." The statute made the new provision applicable to all CGL policies issued in the past, currently in existence or issued in the future.  

   The court considered three challenges to the retroactive portion of the statute: (1) violation of the separation of power doctrine; (2) unconstitutional special legislation or violates equal protection; and (3) violates the contract clause.

   The court found the provision did not violate the separation of powers doctrine. The legislature did not retroactively overrule the South Carolina Supreme Court's interpretation of a statute. Next, the court decided a special legislation analysis was inapplicable to Act No. 26 when it was a general law in that it uniformly applied to all construction CGL policies issued in South Carolina. Moreover, Act No. 26 withstood the minimal level of scrutiny under equal protection because the legislature had a logical reason and sound basis for enacting the provision.

   However, the legislation did not survive the contract clause analysis. While it was within the legislature's power to statutorily define the meaning of "occurrence," it violated the contract clause to apply the new definition retroactively as it would substantially impair pre-existing contracts by materially changing their terms. The unconstitutional portion was severed from the body of the statute, which remained complete in itself. 

   South Carolina's Act No. 26 is similar to Hawaii's Act 83 (codified at Haw. Rev. Stat. 431:1-217) because they both attempt to construe the meaning of "occurrence" more favorably towards contractors and sub-contractors who are sued for construction defects arising from faulty workmanship. Hawaii's Act 83 did not attempt to apply its provisions retroactively, however.

Issue Preclusion from Arbitration Bars Coverage

   Lucian Manganella was the president and sole shareholder of Jasmine, a clothing retailer. See Manganella v. Evanston Ins. Co., 2012 U.S. App.  LEXIS 24360 (1st Cir. Nov. 27, 2012). Donna Burgess, whose sexual harassment allegations against Manganella formed the underlying claims, was Jasmine's human resources manager from 1997 to 2006. 

   In 2005, Manganella sold Jasmine to Lerner New York, Inc., for $30 million. Manganella and Lerner entered a stock purchase agreement ("SPA"), which included an employment agreement stating Manganella would remain Jasmine's president for three years. The SPA placed $7 million of the purchase price in escrow as security in case of a major employment breach by Manganella. 

   In May 2006, allegations of sexual harassment were made against Manganella. He was fired for sexually harassing four female employees, including Burgess, in violation of Lerners Code of Conduct. Lerner invoked the arbitration clause under the SPA to recover the $7 million security. The arbitration panel found Manganella had sexually propositioned several women employees and inappropriately touched and propositioned one of these employees in willful violation of Lerner's Code of Conduct.

   Burgess filed a charged of discrimination against Manganella with the state agency. Manganella notified Evanston, Jasmine's insurer under an Employment Practices Liability Policy. Coverage was denied under the Disregard Exclusion, which barred coverage for conduct committed with willful disregard of any law that was the foundation for the claim.

   Manganella filed suit against Evanston. The trial court agreed with Evanston that the arbitration panel's determination of harassment in willful violation of the Code of Conduct also established the Manganella acted with willful disregard of the sexual harassment law underlying Burgess' charge. Therefore, issue preclusion barred Manganella from relitigating the question.

   On appeal, Manganella argued that Lerner's Code of Conduct was broader and stricter that the state sexual harassment law. The First Circuit disagreed. Both the state law and the Code both reached "sexual advances," "requests for sexual favors," and other verbal" or "physical" "conduct of a sexual nature." Moreover, the arbitration presented Manganella with a full and fair opportunity for adjudication of the issue. Therefore, Manganella was barred from disputing the applicability of the Disregard Exclusion.

Eleventh Circuit Asks Georgia Supreme Court if Construction Defects Are Caused by an "Occurrence"

   The Eleventh Circuit certified a question to the Georgia Supreme Court, asking whether property damage can constitute an "occurrence" under a CGL policy where its effects are not felt on "other property." HDI-Gerling Am. Ins. Co. v. Morrison Homes, Inc., 2012 U.S. App. Ct. LEXIS 23813 (11th Cir. Nov. 19, 2012).

  The general contractor, Taylor Morrison Services, Inc., was covered by a CGL policy issued by Gerling.  The policy excluded "expected or intended injury," contractual liability," and business risk exclusions. Morrison was sued by homeowners in a class action suit. Morrison had allegedly omitted four inches of gravel required beneath the base of the concrete foundations by the Uniform Building Code. Thereafter, the houses sustained water intrusion, cracks in the floors and driveways, and warped and buckling flooring.

   Gerling defended, but sued Morrison for a declaratory judgment. The complaint focused on the "Business Risk Exclusions" as well as the Expected or Intended Injury Exclusion, the Contractual Liability Exclusion, and the definition of "occurrence," arguing the court should declare there was no coverage for the homeowners' claims.

   The District Court granted summary judgment to Gerling, holding there was no "occurrence" because the claims involved only damage to the "insured's own work." One Georgia case had held there was no "occurrence" under a CGL policy where the claim was for faulty workmanship, and the only damage is to the insured's work itself. The plaintiffs here did not allege that any other property was damaged besides the houses that defendant constructed.

   On appeal, the parties disagreed on the meaning of the "other property" language. Gerling argued it should be limited to mean damage to property other than to the completed work itself.  Morrison argued the reference to "other" property meant property other than the faulty workmanship itself.

   Therefore, the Eleventh Circuit asked the Georgia Supreme Court whether an "occurrence" required that there be damage to "other property," that is, property other than the insured's completed work itself.

   This analysis went much further than that of the Hawaii Intermediate Court of Appeals in Admiral Ins. v. Group Builders, 123 Haw. 142, 231 P.3d 67 (Haw. Ct. App. 2010). In Group Builders, the court merely found the construction defect arose from a breach of contract, which was not covered by a CGL policy.

Claim Against Broker Who Secures Inadequate Coverage Survives Summary Judgment

   The insurance agent's motion for summary judgment was denied where issues of fact existed regarding his failure to obtain specifically requested coverage. Am. Building Supply Corp. v. Petrocelli Group, Inc., 2012 N.Y. LEXIS 3476 (N.Y. Nov. 19, 2012).

   The insured was a tenant of a building from which it sold and furnished building materials to general contractors. In discussions with its insurance broker, the insured specifically requested coverage for its employees in case of injury. The agent was also informed that only employees were in the building and not customers. The policy was issued by Burlington, but  included a cross liability exclusion stating that the insurance did not apply to bodily injury to an employee of the insured.

   One of the insured's employees was injured in the building while working. Burlington denied coverage based upon the cross-liability exclusion.

   The insured sued the broker for negligence and breach of contract for failure to procure adequate coverage. The trial court denied the broker's motion for summary judgment. The Appellate Division reversed, reasoning that the insured's failure to read and understand the policy precluded recovery in this action.

   The New York Court of Appeals reversed. Insurance agents had a common-law duty to obtain requested coverage for their clients or inform the client of their inability to do so. To state a case for negligence or breach of contract against an insurance broker, a plaintiff had to establish that a specific request was made to the broker for the coverage that was not provided in the policy. The court concluded that there were issues of fact as to whether the insured specifically requested coverage for its employees in case of accidental injury and the broker, being aware of such request, failed to procure the requested coverage. Further, since only employees entered the building, the coverage which was obtained, excluding coverage for injuries to employees, did not make sense.

   Finally, the fact that the insured did not complain about the lack of appropriate coverage upon receipt of the policy did not bar the insured's claim. An insured was entitled to look to the expertise of its broker with respect to insurance matters. The insured's failure to read and understand the policy was not an absolute bar to recovery under the circumstances of this case.

Agent Not Liable for Failing to Advise of Cheaper Flood Policy

   An insurance agent was not liable for failing to advise the insureds of a cheaper flood policy for their two properties. Green v. Guidry, 2012 U.S. Dist. LEXIS 162581 (E.D. La. Nov. 14, 2012).

   The insureds owned two residences purchased in 1991 and 2006. They purchased flood insurance through an Allstate agent, Ronald Guidry. When Guidry wrote the policies, he allegedly knowingly mis-zoned the properties, which resulted in substantially higher annual premiums than the insureds should have paid and higher commissions to Guidry.

   The insureds claimed that Guidry owed them a fiduciary duty in placing and maintaining their flood insurance coverage. They reasonably relied on Guidry's expertise and recommendations. But Guidry failed to inform the insureds that they were eligible for a preferred Risk Policy ("PRP"), which could provide them with the maximum policy limits for less than their exisitng premium payments.

   The District Court granted summary judgment to Guidry. First, he owed no duty to inform the insureds of their eligibility for a PRP. Second, the insureds had no evidence that Guidry mis-zoned their property. Instead, their fraud claim was predicated upon Guidry's silence and failure to offer the insureds a PRP.

   But Guidry had no duty to review the insureds' policy and determine that they could obtain maximum coverage for a lesser price based on their eligibility for a PRP. Therefore, Guidry was entitled to judgment as a matter of law in the insureds' fraud claim.

   Nor did Guidry violate the Louisiana Unfair Trade Practices Act. Guidry acted consistent with his duties as an insurance agent. He had no duty to inform the insureds that they qualified for a PRP. Even if he did, this was not the sort of egregious conduct that rose to a violation of the Unfair Trade Practices Act.

   Regarding the negligence claim, where there was an agreement to procure insurance, the insurance broker's duty was analogous to the duty of the agent. The insurance agent owed a duty of reasonable diligence that was fulfilled when the agent procured the requested insurance. Guidry, however, did not owe a duty to advise the insureds of the correct type of coverage, and thus no duty to inform them of their eligibility for a PRP. Instead, the insureds were charged with knowledge of the existence of the PRP.

Ensuing Loss Provision Does Not Salvage Coverage

   The insured sought relief from the ensuing loss provision when the wear and tear exclusion barred coverage. Rapid Park Indus. v. Great N. Ins. Co., 2012 U.S. App. LEXIS 23107 (2nd Cir. Nov. 9, 2012).

    The insureds leased and operated a parking garage on the lower levels of a building in Manhattan. The City's Department of Buildings Issued a vacate order for failing to maintain the garage. The garage was closed and padlocked by the City.

   The insured filed a claim for business interruption with Great Northern. The claim was denied, based in part on the wear and tear exclusion. 

   The insured sued Great Northern for breach of contract and bad faith. The insured argued the wear and tear exclusion did not apply, and even if it did, the ensuing loss exception preserved coverage. The district court [decision reviewed here] granted summary judgment to Great Northern.

   The Second Circuit affirmed. First, the District Court correctly held that the wear and tear exclusion was applicable. Second, the ensuing loss exception was not applicable. The insureds argued that the water that originally seeped into the garage resulted in its deterioration. But this damage was not "ensuing." in the sense that it was a separate, subsequent event that occurred due to the deterioration. Instead, it was directly related to the original excluded risk, which New York courts excluded from the "ensuing loss" exception.